BlackRock and Lobby Groups Fight Swaps Fiduciary Rule

BlackRock Inc. and the largest U.S. business lobby groups are fighting to strike a provision in the financial regulations overhaul legislation that they say could harm millions of investors in retirement plans and pension funds.

A measure requiring swaps dealers to treat clients as a fiduciary, or to act in their best interest, would effectively bar retirement plans from buying derivatives they use to manage portfolios, BlackRock and the groups say, according to Bloomberg. They argue it would make it impossible for them to offer stable-value funds in 401(k) or other tax-deferred saving plans. 

BlackRock sent an alert to clients asking them to weigh in with lawmakers on the issue. The U.S. Chamber of Commerce, the Business Roundtable, the National Association of Manufacturers and other trade groups sent a letter to senators this week, calling the provision a “grave threat to the private retirement system.” 

Bloomberg said the American Benefits Council is also lobbying to get the fiduciary provision eliminated. 

Barbara Novick, a BlackRock vice chairman and head of government affairs at the firm, said her firm is taking on the issue because the restriction would limit investment choices and drive up costs for its corporate, union, and public pension fund clients.  

Pension plans use derivatives, including interest-rate swaps and index swaps, to reduce risk or diversify portfolios. Stable-value funds use a derivative known as a book-value wrapper that is integral to their conservative investment strategies. There is an estimated $700 billion invested in stable-value funds, and more than 60% of defined contribution plans offer a stable-value option, Bloomberg noted. 

The business groups are concerned that the definition of fiduciary—not spelled out in the legislation being debated in the Senate—would fall under the strict federal law that covers corporate and union benefit plans. Public funds would be affected under similar state laws. 

If that happens, a swaps dealer would be required to put the plan’s interest first, and the groups say that’s impossible because the two sides in a swap have conflicting interests—one wants to buy at the lowest cost and the other wants to sell at the highest price. 

The fiduciary requirement is endorsed by labor groups including the AFL-CIO and American Federation of State, County and Municipal Employees.